How much is a bitcoin worth?

This number is marketing for Bitcoin. It’s meant to give the impression that Bitcoin is a solid tradeable object with an orderly market structure, that you can meaningfully price it down to the cent, and that all this is fine and sensible. But this is an illusion.

The singular “price” of Bitcoin doesn’t exist — it’s a made-up number. It’s not a number you could expect to exchange a bitcoin for — it’s an average of the last sale price on a bunch of exchanges. (CoinDesk’s index uses Coinbase, Bitstamp, itBit and Bitfinex. Followers of crypto will have just exclaimed “what!” at that last one.)

If you look at the spread between exchanges — the different prices for one interchangeable bitcoin — you’ll see spreads of hundreds of dollars, and in volatile moments it can be in the thousands.

Quoting a number like “$19699.46” to seven significant figures when your data’s got a 5% spread would get your high school physics teacher slapping you upside the head. It’s entirely deceptive. It should say something like “$19,700 plus or minus $500 depending,” and that line graph should be a thick grey bar.

“Market cap” is even worse. It’s literally just whatever the last price was, multiplied by the number of tokens in existence. This is a bogus number that’s not actually applicable to anything — it’s not money that was put into the crypto, it’s not a realisable value like a company market cap, it doesn’t affect prices — it’s just an easily-calculated splashy-looking number that looks good in a headline. Trading is so thin in any crypto, even Bitcoin, that you could never realise a fraction of the number. It is literally just marketing.

Isolated islands, posing as a continent

In normal securities trading, if a share is listed on multiple exchanges, orders will often be applied via smart order routing — so that a given buy or sell order is in the context of all the order books for that stock. This avoids liquidity fragmentation — where the various exchanges’ order books are unnecessarily isolated from each other, making each a separate trading pool, thus more volatile and harder to trade in. This is easy because, unlike bitcoins on exchanges, the actual exchanges don’t need to hold the stock for a trade to happen.

This doesn’t work in Bitcoin — all trading is isolated on each individual exchange, and the bitcoins are actually there on the exchange. This is a recipe for huge volatility and wide discrepancies in price.

Furthermore, in normal securities trading, spreads in pricing between exchanges tend to quickly equalise through arbitrage — buying on one exchange to sell on another, at a profit. This pulls the price up on the first and down on the second.

The structure of the Bitcoin market is such that this doesn’t work very well. If you want to profit from spreads in the price of Bitcoin, you need to:

Buy some Bitcoin on one exchange.

Withdraw it from the exchange — let’s assume you send it directly to the second exchange’s Bitcoin deposit address — and confirm this transaction on the blockchain (at least 10 minutes’ delay), with at least a $25 transaction fee if you want it confirmed in the next block or two. Double that if you want to be sure.

Sell it on the second exchange.

The delays — ten minutes to over an hour — and fees add enough friction to generate the spread between exchanges, even if you assume everyone’s using trading bots as quickly as possible.

So each exchange operates as an island. The “price” number doesn’t apply on any of the island exchanges.

What’s life like on one of the islands?

What “unregulated” means in practice

When you buy normal securities or commodities, you assume that the trading environment is regulated sensibly, and that the exchanges keep to the rules set by law and, fundamentally, won’t mess you around.

You can’t assume this at all in crypto trading. This is what “unregulated” means.

The important thing about securities regulations is that every single one is there because someone ripped a lot of people off that way. They ensure market integrity. So even investors who understand high risk — and what it means when we say that cryptos are ridiculously volatile and not backed by anything — may not be fully aware of the degree to which the trading environment itself is part of the threat model in cryptos.

(One glaring example was the 2016 collapse of iGot in Australia, which hit a lot of small-time retail investors: “I just assumed that since they’re in Australia there would be some sort of safety net or regulation or something like that — bare minimum — where he could be accountable for his actions.”)

There are various shenanigans that are banned on real securities exchanges for good reason, but are standard in crypto:

painting the tape — like wash trading, but with two or more participants. Mark Karpelès admitted in court that he had been using the “Willybot” to pump up the Bitcoin price on the Mt. Gox exchange during the 2013 Bitcoin bubble.

insiders with access to the database trading on their own exchange — Bitfinex officers trade on the exchange themselves. They state that they avoid conflicts of interest, but there is no oversight or transparency on this.

The US Commodities and Futures Trading Commission has listed many of these as specific problems that are notably worse in the Bitcoin marketplace than in other markets:

Beyond their practical and speculative functions, the emergence of these nascent markets has also been negatively marked by a variety of retail customer harm that warrants the Commission’s attention, including, among other things, flash crashes and other market disruptions,52 delayed settlements,53 alleged spoofing,54 hacks,55 alleged internal theft,56 alleged manipulation,57 smart contract coding vulnerabilities,58 bucket shop arrangements and other conflicts of interest.59 These types of activities perpetrated by bad actors can inhibit market-enhancing innovation, undermine market integrity, and stunt further market development.

Because inside the exchanges is the Wild West, the interface between exchanges and the world of regular finance is stringently regulated. This causes tremendous problems for getting actual money out of exchanges, as we’ll see in part 2. And does questionable things to send the price up …

Next time: why it’s hard to get actual money from the exchanges into your bank account. A little bit KYC/AML, a little bit oddly-advantageous incompetence, a little bit dubious practices.

Update: Not letting through any more comments about how you cashed out so it must be OK!! That’s nice, but you know lots of the new retail investors are having trouble, and that’s a problem worth talking about. (Except the guy below who claimed he cashed out of Bitfinex two months ago, that’s not a statement you get to make without a great deal of supporting information.)

Tell the many, many perfectly normal non-criminals I talk to who have ever-lengthening delays and no response from customer service getting their money into their bank account from Coinbase, for example.

A lot of people are cashing out fine, but there are serious systemic problems, that should be fairly obvious with a bit of thought. I’d best be getting on with part 2 then …

No, the series title so far is pure clickbait. Yes the price is more accurately represented by a band rather than a number. Yes, transaction fees are high. Yes, arbitrage, (by definition – risk free profits!) is hard. I absolutely agree that “market cap” is a useless metric. But “you can’t cash out” is complete nonsense. There is absolutely no reason you can’t cash out, unless you are a top 0.1% holder and for some reason want to sell it all at a short notice.

Mostly that most of the people getting into it now did in order to get out of it. It should be obvious that this is the point, and whatabouting about “any other asset class” is playing thick. Also, that the trading in any crypto, even bitcoin, is way thin.

This is very insightful. As someone with no competency in this area though I have no way to truly validate one way or another, so would really appreciate if you could share a theoretical “opposing” argument too. Thanks!

I am a Bitcoin advocate and I agree. I keep telling everyone that Bitcoin will fall. And raise. And fall. And exchanges will defraud them and fail them. Multiple times, as it has in the past. I also keep saying that Bitcoin cannot fail, regardless if there is an investment bubble right now.

Bitcoin is a disruptive technology in its infancy, the fact that people can invest in it for potentially great profit or great loss is coincidental. Unlike for example in the case of a public company, progress will happen regardless of exchange rates, since bitcoin can’t go “bankrupt”. Just saying that because many people will automatically assume that if there’s a bubble and it bursts it means something fails.

You are right to warn everyone however and I do the same. Worth pointing out that some of these points can be alleviated by using something like Bisq bisq.network

Bitcoin may not be able to go bankrupt, but exchanges/wallets can. As soon as so many people want to cash out into another currency (e.g. USD, EURO) you’ll quickly find that you can no longer take your money out of your Bitcoin wallet.
But I’m sure the author will cover this in the next installment.

Anything can happen with third parties (exchanges and third party wallets), and that’s why people should keep any amount of Bitcoins that they are not willing to risk in their own wallet. Not being able to literally cash out is unrealistic, because there is a significant amount of people that will be willing to buy at some price, through various channels (could be a centralised exchange, a peer to peer exchange or even face to face, using escrows).

My point is that none of what can happen with a centralised exchange (fraud, failure, whatever) can cause Bitcoin itself to fail. I just want to separate the mindless investing madness from what Bitcoin actually is about. Every time a third bitcoin-related service fails a bubble bursts and exchange rates takes a dive there is a new circle of obituary articles, as if somehow Bitcoin’s purpose is that people profit by exchanging it and it somehow failed.

spot on! anyone who has any hesitations or question is a heretic and non-believer.
never mind that “proof of work” as a cryptographic backing principle is a foolish recipe for wasting a lot of electricity, contributing to global warming, among other issues. The particular blockchain implementation used by BTC has a host of other issues as well. I don’t think it’s a particularly well designed crypto currency and we will see better implementations along the way.

I can’t speak to the troubles Americans are having cashing out, but Canadians can do so quite easily at QuadrigaCX. No ID required, just an email 2FA. I used Interac eTransfer and the money was to me in about 12 hours. That said, I don’t know how easy/fast this would be during a rush for the exits should it come to that.

$25 was the average transaction fee at the time of posting. If you want your arbitrage to happen as fast as possible – which is pretty much the point – then you’ll need to pay more to make sure it gets into a block sooner rather than later. We’re well into the “fee market.”

You don’t actually need to transfer the coins from one exchange to another to achieve arbitrage if you have a stash on both exchanges. You can then just move coins between exchanges at a slower rate to keep a rough “balance” between the two.

Also, if the two exchanges had a LTC-BTC market you could swap to move the coins between exchanges, but obviously at some “brokerage” cost that would adjust the equation of what useful arbitrage margin is.

The whole time reading this article I’m like make sense. It only makes sense if you’re applying something very relative to the stock market. This is something we never seen before. People keep placing stock market rules and past bubbles to this. Cryptocurrency was invented by a powerful technology and technology is only getting better. If this does get huge and you never bought into Cryptocurrency well you might be hugely broke and your old belief system kept you from what could of been the easiest way to become a millionaire in your life. Cryptocurrency to me is not even about being a currency. It’s more about security in the future and technology is moving at such a rapid pace. New Cryptocurrency known as alt coins (crypto other than bitcoin) are appearing everyday. It’s very easy to fall behind and soon will be a fine line between well versed in computer science and not well versed on computer science. The trajectory of technology is that one day you might have to learn one new thing then three the next the two more the next day and before you know it your behind. That’s the pace technology will move. This whole article is garbage it’s like I was reading stock market business tips or something. The backing to all Cryptocurrency is the hella powerful technology what currency has that as a backing?

“well versed in computer science” lol… religious nuttery abounds.
Please describe how “computer science” necessitates a particular approach to a crypto-currency and demonstrate how the BTC blockchain is the inevitable product of pure comp-sci research LOL

“fall behind” meaning late to your ponzi party? aka the next round of victims?

I will merely grant that public ledgers like blockchains can have interesting applications. I think BTC was extremely poorly designed and “proof of work” is a recipe for planetary suicide. Feel free to discuss actual technical details if you disagree.

> Cryptocurrency was invented by a powerful technology and technology is only getting better.
> security in the future and technology is moving at such a rapid pace
> The backing to all Cryptocurrency is the hella powerful technology

You seem to put a lot of faith into a technology you seemingly know next to nothing about. This kind of blind faith in “powerful technology” is like saying “we put a man on the moon, surely we can put a man on the sun”. No, the bitcoin blockchain isn’t a Panacea, and nothing is.

> It’s very easy to fall behind and soon will be a fine line between well versed in computer science and not well versed on computer science.

I’ll just say this: at the moment, the majority of the population only uses computers for facebook and instagram. Also at this moment, a large portion of software developers are overly proud hipsters who barley understand one programming language and can write web apps. That future is pretty far, and the reality is much more complicated than you presented.

> This whole article is garbage it’s like I was reading stock market business tips or something.

Not only did you not understand the article, the moment you sensed it has something to do with “stock market business” you ran away and complained it’s bullshit, probably because that’s everything you know about stock markets.

As far as I can tell, you’re someone who doesn’t understand the technology but thinks it will solve all problems, and also doesn’t understand economy or the stock market but still wants to get involved with trading.

I’m sorry to tell you, but it’s exactly this kind of people who drive the price of bitcoin up artificially, and you’ll be the ones to suffer when it crashes because you’ll still hope, even while everything is crumbling, that this great technology will survive, make a comeback, and will make you rich.

Dude, technologists don’t refer to a system that can’t even process 4 transactions per second as “great technology”. We refer to that as “pathetic” as in a Z-80 with floppy disks could do better than that.

While it is a noble undertaking to warn the public about the dangers of crypto-currencies I think less of a bashing style would do even greater good. A few points to ponder:
1. Large price differences from one second to the next / between crypto exchanges: Same could be said about the “Neuer Markt” (during dot com boom). It was completely normal for a stock to be up 8% one day and down 5% the next. Germany had 8 different floor exchanges plus one electronic one and for lesser traded stocks you could easily have prices differing by more than the 2.5% mentioned in Bitcoin. While this is not great, one has to acknowledge the nascent character of crypto-currencies.
2. Order spoofing, front running, insider trading etc ALL exist in US capital markets despite regulation. Again, not great, but I would give it a bit time to sort out.
3. Backed by nothing: true, but so is the dollar (and all other fiat currencies in the world). Statements like these make the reader wonder if you understood the concept of money and the interesting proposition crypto-currencies with limited maximum issuance offer.
4. Large fees for withdrawal: agree, not nice. But again, try to take home a stock certificate that you own. In most cases not possible (since none are printed) or you might face exorbitantly high fees.
Could go on but must catch a train.
Best, R.

“Market cap is even worse. It’s literally just whatever the last price was, multiplied by the number of tokens in existence. This is a bogus number that’s not actually”

You just described the entire securities market and then held cryptocurrency to a higher nonexistant standard to justify your problems with it. Interesting to say the least

You didnt describe the title of the article in this part of the series, at best you described slippage which exists in all markets. I wish for smart order routing in mature crypto exchanges to appear, and you could just as easily discuss the improvements of liquidity. There are several trade desks that faciliate big over the counter trades to let you buy or sell crypto at the index price with less than 1% slippage. This is the same as the stock or commodities markets if you want to move large volume.

But so far anyone with a counterpoint is paraded around as “proof” that blockchain users are religious fanatics. An odd way to alienate everyone.

I enjoy the comprehensive nature of this analysis, Hope this helps spur a more objective discussion

Your description of how one would arbitrage is just wrong. What you would actually do is maintain USD and BTC balances on multiple exchanges. Then, if the prices are different, you can immediately execute trades on both exchanges at the same time. If necessary, you rebalance your accounts every once in a while (eg daily).

Perhaps price differences between the exchanges are determined by the difficulty of USD withdrawals? (In theory, the harder it is to get USD out of the exchange, the higher the BTC/USD price would be).

Pretty sure a pile are arbitraging in the manner I describe, though often using an altcoin as the intermediary (I kept it simple above). But certainly, your method too – in fact, it appears that the exchanges have a pile of orders on each other’s books, e.g. when trading halts on one exchange and half the order book on another exchange disappears.

However it’s done, the point is that (a) we can assume as absolutely much arbitrage as is feasible is happening as fast as possible (b) we still have hundreds-of-dollars spreads between exchanges, therefore (c) the Bitcoin market is horrendously inefficient.

I see a lot keyboard warrior of bitcoin attacking many articles about bitcoin fraud. i feel it is a part of a organized people. I personally believe that the time will tell if it is a fraud. We just have to wait

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The content of this site is journalism and personal opinion. Nothing contained on this site is, or should be construed as providing or offering, investment, legal, accounting, tax or other advice. Do not act on any opinion expressed here without consulting a qualified professional. I do not hold a position in any crypto asset or cryptocurrency or blockchain company.